Who gets “made whole” first? Insurance companies at odds with policyholders following recovery in a lawsuit
Over 20 years ago the Texas Supreme Court decided in Ortiz v Great Southern Fire & Casualty that an insurance company is not entitled to recover from the proceeds of a policyholder’s lawsuit until the policyholder has been made whole. What this means is that an insurance company cannot seek reimbursement for the claims it paid to its customer until the customer’s recovery exceeds all expenses related to the loss. The practical result is that an insured person can often recover medical expenses from his or her insurer and other damages such as disfigurement or loss of income from a negligent party and keep both amounts unless it would result in a double recovery. This was based on the principal that, since the insurance company was paid a premium to assume the economic risk resulting from injury to the policyholder, the insurance company should not recover before the policyholder. Insurance companies retained the right of subrogation to prevent double recovery, but the “made whole” doctrine ensured that the customer was, in fact, made whole first.
Since the Texas Supreme Court’s decision in Ortiz, insurance companies have revised subrogation clauses in their policies to combat the “made whole” doctrine, attempting to recover before or alongside their policyholders instead of after the insured is made whole. In Fortis Benefits v. Cantu, the Texas Supreme Court determined that insurance companies may dispose of the “made whole” doctrine in certain situations by placing contract clauses to that effect in the insurance policies.
The result is that insurance companies and their insureds may be at odds following recovery of damages in a lawsuit by the insured. Both insurance companies and policyholders are likely to require legal guidance following resolution of a personal injury or property damage case to determine the rights of the parties to the recovery. The insurance coverage attorneys at McCleskey are experienced and knowledgeable regarding these issues and are able to assist both insurers and insureds in subrogation disputes.